Broker Rule: IRS Requires Non-Custodial Services To Report Trading Information

• The IRS has finalized a rule subjecting non-custodial trading services to IRS reporting requirements going into effect in 2027
• The rule affects providers of "front-end services", including browser extensions, apps and websites offering digital asset trading services
• The rule is meant to "ensure that all taxpayers play by the same set of rules and have access to the information they need to file their taxes accurately"

The US Treasury has finalized its "broker rule" to go into effect in 2027, regulating the use of non-custodial trading services – or so called "DeFi" – establishing that custody over funds is not necessary to be considered a broker by the IRS.

Under the new rule, providers of "DeFi front-end services" are obliged to report trading activity via the 1099 tax form to the IRS.

According to the Treasury, "the final rules announced today do not change or impose any new tax obligations on digital assets. Taxpayers have always been obligated to include gains from sales or exchanges of digital assets in their income. Instead, the rules announced today require brokers – not digital asset holders – to report on the gross proceeds of the sale of their digital assets through a Form 1099."

As the Treasury notes, "the final regulations do not treat operators of digital protocols or developers of protocol software as brokers," and makes a distinction between what it defines as "basic wallet features", such as offering the signing of transactions via private keys, and "DeFi front-end services", referring to the trading of assets.

A "DeFi front-end service", according to the final regulations, can be defined as "screens, buttons, forms, and other visual elements incorporated in websites, mobile device apps, and browser extensions—that users can use to trade digital assets in their unhosted wallets".

The reporting requirement is applied to providers offering mobile apps, websites, or browser extensions which include non-custodial wallets themselves while offering trading options such as swaps, or enable users to connect their own non-custodial wallet while offering trading options such as swaps, as long as the service provider is proven to retain a certain amount of "control" over the services.

The rule defines control as having "the ability to amend, update, or otherwise substantively affect the terms under which the services are provided," as well as "the ability to collect the fees charged for those services from the transaction flow [...] whether or not the person actually collects fees in this manner," and/or if that person has the ability "to add to the order a sequence of instructions to query the cryptographically secured distributed ledger to determine if the processed order is, in fact, executed or to use another method of confirmation based on information known to that person as a result of providing the trading front-end services." The rule excludes "validation services".

According to the Assistant Secretary for Tax Policy Aviva Aron-Dine, "these regulations will help ensure that all taxpayers play by the same set of rules and have access to the information they need to file their taxes accurately."

"By collecting more information from brokers, the owner of a digital asset who engages in DeFi transactions will receive a Form 1099 from brokers and be reminded that those transactions are taxable, thereby reducing the number of inadvertent errors or noncompliance on the taxpayer’s federal income tax returns and saving taxpayers time and money during the filing process," the press release reads.

Independent journalism does not finance itself. If you enjoyed this article, please consider donating to our Geyser Fund.